LIMITING RISK OF LIABILITY

What is benefit of incorporating of a company? One of most important benefit of incorporation is limiting risk of liability.

In case of traditional form of businesses; proprietor, partnership or family businesses; there is no concept of limited liability. An owner or part – owner is responsible to pay all business debt even from its own pocket. We always know, business money (galla) is different from personal money. But, owner of a business remains in risk of liabilities towards creditors and government personally.

Limiting Risk

Loss in business is normal, why should a business owner held responsible unless he was genuine and have not committed any fraud. Same way, creditor gives money for business purpose, why should creditor be allowed to ask money from personal account of the business owner. Mostly, small businesses and their owners have no different identity.

Concept of limited liability helps in such cases. In a limited liability system, liability of a business organization is limited to resources of that particular business organization. At a time of payment, liability never comes to owners of the business organization. Suppose owner has worth of five thousand crore rupee but business has worth of five crore rupees only and loan of 6 crore rupees; creditor may not claim more than five crore rupees which is worth of the company. Creditors cannot claim any amount form owner unless a fraud committed by the owner has been proved.

Such limited liability organisation may be a private limited company, public limited company, limited liability partnership. Recently, Indian law recognized one person company as a sub – domain of private limited company.

This is welcome step towards inclusive growth. This will save thousands of small and medium businesses from risk of unlimited liability. I hope, this may include our farmers and artisans as well.

One person company is an incorporation of a business owned by a single person. This save single owner from search of another partner and also from risk of sharing his trade secretes with other partner. This is most significant benefit after limited liability.

However, one person company want a nominee and such nominee shall give consent to be a future owner of the business. Such nominee need not be legal heir. Legally, owner may pass property in business to outsider in event of his future incapacity or death. In case of succession planning in family with more than one legal heir, the selection of nominee may need better planning. This is perhaps only downside of one person company other than common business risks.

If properly explored by SME sector, One Person Company shall be most significant contribution of the Companies Act, 2013.